The article below appeared in the January 2010 issue of Technology Transfer Tactics. Click here to subscribe.

The U.S. Supreme Court’s much-anticipated ruling in the Bilski case will likely alter the landscape for business method patents and send shockwaves through the tech transfer community. Though no one can predict for certain the outcome, many observers believe the days of business method patents are numbered. Some experts advise TTOs to prepare now and determine their patent portfolios’ exposure to Bilski-related turmoil, decide how vigorously they want to defend affected patents, if at all, and explore alternatives for protecting relevant IP in other ways.

The case [In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc), cert. granted, 129 S.Ct. 2735 (2009)] will address what types of processes should be eligible for patent protection under 35 U.S.C. § 101. The specific claim, widely expected to stand as a precedent for other business method patents like it, involves a method of hedging risk in the field of commodities trading. In a split decision, the lower court confirmed the U.S. Patent and Trademark Office’s ruling and said the appropriate measure of patent eligibility is the so-called “machine-or-transformation” test. In short, upholding that ruling would mean a business method, to be patentable, must be tied to a specific piece of hardware or must transform something into something it wasn’t before.

Assuming the High Court does not overturn the ruling completely — which must pundits are betting against — TTOs should plan to modify their existing patent applications to ensure they hew as closely as possible to whatever fine points the justices put on business method-related patents. But what, exactly, those points will be is a still a matter of considerable speculation.

“Many believe the Supreme Court is likely to be critical of [that] standard,” says the legal team of Charles R. Macedo, partner, and Norajean McCaffrey, associate, at Amster Rothstein & Ebenstein LLP, New York, responding in writing to questions posed by TTT. “What is interesting is while virtually everyone believes the court will be critical of the decision, there is a wide range of opinion of what that criticism will be. Some have suggested that the federal circuit’s decision defined patent-eligible subject matter too narrowly. Some have suggested the decision defined [it] too broadly. And some have suggested the decision is simply off base.”

Clearly, however, the Supreme Court has something to say on the matter, notes Lisa Muhleck, a partner at Quinn Law Group in Novi, MI. “It is unlikely that the Court granted cert to merely affirm the [lower court's] decision,” she points out, “At the very least, the Supreme Court will most likely clarify or tweak the test.” Indeed, Macedo and McCaffrey add, “the Court in the past has not been afraid to announce retroactive rules. Although it seems inappropriate, the decision in Bilski could have an adverse impact on hundreds of thousands of already issued patents. We have already seen some district courts invalidating issued patents based on a narrow interpretation of the federal circuit’s decision.”

For now, the pair advise, “it still makes sense to hedge your risk by continuing to seek patent protection. However, it may make sense to forgo non-US rights and maintain the application as a ‘Do Not Publish’ application during pendency.”

Advice on claims construction

Scott Alter, an attorney with the Denver firm Faegre & Benson, advises TTOs to “prepare for what I call ‘the most reasonable worst-case scenario’ when the ruling comes down from the Supreme Court and the lower courts start to interpret it. That means, for example, putting as much ‘meaningful’ hardware as you can into at least some, but not all, of your patent application claims — and that means a specific type of machine.”

Adds Muhleck: “With respect to the specific machine, because the court did not want to determine whether a ‘computer suffices to tie a process claim to a particular machine,’ it may be enough to draft process claims such that the process is implemented on a computer or other device. With respect to the transformation of an article, the court requires that the process transform the article into a ‘different state or thing.’ In Bilski, the court provides the example that simply transforming electronic data into a visual depiction may be enough to satisfy that requirement.”

For issued patents, Alter says, if you don’t have continuations pending, you may still have opportunities to submit a reissue application. Again, that should be considered for some, but not all, claims, he cautions, “because we don’t know yet where the Court is going with this.” In general, he says, TTOs should “work both ends of the spectrum” by having hardware-heavy claims as well as those that push in the other direction “to accommodate the new realities — whatever they might end up being.”

Because filing numerous claims gets expensive, it is also important to draft the specification to include various hardware and data transformation embodiments where possible so you can more flexibly adjust the claims later, once the “new reality” sets in. Macedo and McCaffrey agree. “We recommend that TTOs hedge their bets in patent prosecution strategies,” they comment. “Offices that drop all business method patent applications may save prosecution costs, but could end up being the big losers down the road if the Supreme Court adopts a broader rule than the federal circuit.”

Meet with PTO examiners

Moving forward, Alter also advises that TTOs insist on face-to-face or telephone interviews with USPTO examiners. “If you have Section 101 rejections, you can ask what their issues are and more readily remedy them,” he says. The PTO has issued interim examination guidelines including “some great PowerPoint examples that illustrate what it considers to be patentable subject matter and what it does not,” he adds. “It’s pretty clear what a TTO can readily do to mimic those claims. You can tell the examiner that you modeled your claims on the USPTO’s guidelines so it should allow the claims — or at least not hit you with a 101 rejection.” In general, he adds, TTOs post-Bilski should “try to avoid class 705,” the business method area the USPTO uses for patent applications. “You face extra scrutiny if your application goes that way,” Alter explains. “It’s a good idea to steer your application in a different direction — depending on what technology you have. That is often quite doable.”

He also cautions that your portfolio of IP that could be affected by changes in the protection afforded business methods may be bigger than you think. “Bilski is influencing a lot of things people wouldn’t necessarily think of as business methods,” Alter points out. “In a district court case related to half-toning technology in printers, the court granted summary judgment for lack of statutory subject matter because of Bilski,” he illustrates.

The trade secret option

According to Jim Baker, PhD, director of technology and economic development at the Houghton-based Michigan Technological University, if the Supreme Court decision imposes new restrictions and an IP asset is too close to a business method for comfort, you may consider trade secret protection instead.

“If the Supreme Court upholds the federal circuit’s decision in Bilski, the scope of subject matter eligible for patents will be reduced — but it will not be eliminated,” he stresses. “Specifically, business methods that satisfy the ‘machine or transformation’ test will remain patentable and technologies that are no longer eligible for patents can be protected via trade secret when possible, and otherwise monetized through execution in developing know-how, expertise and business growth from practicing the method.”

However, notes Wesley D. Blakeslee, executive director of the TTO at Johns Hopkins University in Baltimore, trade secret protection is not “a first choice at a university. Most ‘business methods’ of value are not widely known, because of the desire of a successful business to keep its secrets to itself,” and that fact has actually helped fuel the influx of patents in this category. Because corporations kept the methods secret, he explains, they were not published. “So the Patent Office thought they were somehow new and non-obvious,” granting protection in many cases to so-called innovations that were already being practiced.

Blakeslee and Baker also point out that trade secrets by definition are antithetical to university commercialization efforts. Trade secret protection is “difficult and even arguably improper for university TTOs, given our primary missions of discovery and dissemination,” Baker comments. “If protection of a technology under a trade secret can provide better public benefit than disclosure of the trade secret, then it may be possible. But trade secrets are very difficult to secure in an academic setting.”

Even if a trade secret approach is viewed as desirable, Macedo and McCaffrey point out, “it is too late to rely on trade secret law for the hundreds of thousands of already-issued patents and published patent applications. And trade secret law continues to have historical disadvantages: It requires vigorous maintenance, it can at times be difficult to define, and it can result in someone else obtaining a patent that relies on the innovation.” Copyright protection may be a decent substitute for a patent in some cases, although, as Alter points out, it’s “not as robust as a patent, and it just protects the expression and not the underlying idea.”

Potential impact on license agreements

Bilski may also affect licensing agreements for patents based on business method claims, Blakeslee points out. “If possible, provide some value added in addition to the patent,” he suggests, “such as trade secrets, data, materials, training or consulting.”

While noting that “there is not a large proportion of university patents that would be considerably compromised if the Supreme Court upholds the federal circuit’s decision in Bilski,” Baker says that “if a licensed patent is of questionable validity after the final ruling, there will likely be at least a request to renegotiate the royalties.” That can be defended against by having complementary technologies in the portfolio that are not at risk of being compromised by the Bilski decision, he advises. “Specifically, try incorporating elements that satisfy the ‘machine or transformation’ test in the existing technology, bar dates notwithstanding,” he says, “or try developing new technology that achieves the same objective but satisfies the ‘machine or transformation’ test or is otherwise patentable post-Bilski.”

Add Macedo and McCaffrey: “One way to avoid licensing risks is to receive a lump sum payment up front. Other ways involve making sure the contractual language of the agreement provides a disincentive to challenge the patents and lose.”

But such challenges may well arise if the case throws business method patents into question, and a TTO’s ability to respond may be weakened, Blakeslee observes. “Patents remain valid until challenged,” he says, “although one would look closely at Bilski before instituting an infringement suit.” Indeed, Baker adds, “some licensees might predict that a technology will no longer be valid and decide to cease royalty payments, taking the risk of an infringement suit on the bet that they can invalidate the patent in litigation or under a re-exam.” The university in such an instance would need to assess its position on validity in light of Bilski and make a judgment call regarding enforcement.

Sensing an advantage, some licensees may seek renegotiation of terms, Baker adds. “If a licensee suspects, but isn’t sure, that the final decision in Bilski compromises a patent’s potential viability, it may request to reduce its royalty obligation.”

Blakeslee notes one potential upside in the infringement arena: “Some of the patent trolls who have claimed broad method coverage for their patents may be dissuaded from litigation.”

Sky is not falling

Despite intense interest and coverage of the case, the post-Bilski future is far from bleak, sources agree. If the Supreme Court upholds the lower court’s decision, the USPTO will likely issue examination guidelines for use by examiners and for patent filers in assessing the scope of eligible subject matter, for one thing.

In terms of impact on TTOs, “universities don’t try to patent business methods very often,” notes David Aston, an attorney with Peters Verny LLP, Palo Alto, CA. “The biggest worry that I see for university TTOs is in the field of software, although many universities forgo patent protection for software and license it under copyright and/or trade secret protection.” To gauge the potential impact, he adds: “for fun I searched the USPTO database of issued patents and found 1,852 where the term ‘calculating’ appears in the claims and the term ‘university’ appears in the assignee name. There were 2,854 university patents where ‘antibody’ appeared in the claims, by way of comparison. The principles of Bilski have also been applied to diagnostic methods, however, and universities should be aware of those ramifications. Diagnostic method claims may not be as broad as they were pre-Bilski.”

Baker agrees on the limits of Bilski’s reach in academic tech transfer. The case “will not have tremendous impact on traditional tech transfer practices,” he asserts. “Business methods are inherently difficult to detect, and therefore business method patents are more difficult to enforce and generally aren’t a core focus for university technology transfer.” The future, he says, “won’t look a lot different for university TTOs than the pre-Bilski world does. At least for us, patents that are of questionable validity in the expected post-Bilski world have always been low priorities based on other practical matters related to their prospects for licensing, infringement detection and enforcement.”

Blakeslee wouldn’t mind a higher hurdle for patentability, in fact. “I was never a supporter of broad business methods patents as they were allowed prior to Bilski,” he says. “I don’t know that many of the so-called ‘business methods’ were actually patentable, and I disagreed with the ruling in State Street Bank & Trust Company v. Signature Financial Group Inc. Actually, I think Bilski was much more inventive than State Street, which was simply a series of mathematical calculations. Computer-based matters will be most affected, and the ‘one click’-type business method patent could be at risk, for example.”

But overall, he says, there’s no cause for panic. “Everyone thought the world would end with Medimmune, but nothing has much changed,” he comments. “Then it was KSR, and the world was coming to an end. Now it’s Bilski, and next year it will be something else. The world changes and we adapt.”

The monetary value of the patents in your portfolio — and the cost of protecting keeping them — should stay largely the same, Muhleck adds. “The decision may be used as another vehicle for enforcing or defending the validity of issued patents,” she says. “However, based on the significant cost of patent litigation, I don’t predict any significant rise in litigation stemming from the decision. That also means there should not be any significant change in the value of patent portfolios or the revenues generated by process or business method patents that have already been issued.” The biggest impact, she says, will be on process patents that go in front of examiners following the decision.

IT space could be hit hard

University TTOs with a big stake in the information technology field may not be so sanguine, however. John R. Harris, a partner in the Technology/IP Group at Atlanta’s Morris Manning & Martin LLP, notes that Bilski has the potential to be disruptive to the notion of patent protection for more than just business methods. “A poorly rendered decision could have significant negative effects on the information technology industry,” he says, “especially technology start-up ventures.”

His personal view is the claims in Bilski are “too abstract and ‘human-implemented’ and not particularly technical in nature,” and he says he “has a hard time seeing how they’d be patentable on grounds of novelty and non-obviousness.” That, he adds, is what the USPTO should have done in the first place: Find a good prior art reference and reject the claims on grounds of lack of novelty or for being obvious. “However, the USPTO and the federal circuit apparently decided instead to make Bilski a test case,” he says. “I almost think they were taunting the Supreme Court to take the case on.”

The machine-or-transformation test in Bilski is “pretty easy to apply,” he adds, and “there are some circumstances where the test might be useful in weeding out unpatentable subject matter.” But it also “has the real potential to be too rigidly applied by USPTO examiners and the Board of Patent Appeals and Interferences,” he warns. “The agency has to implement court decisions via regulations, and many examiners apply the regulations in a formulaic, rigid manner. So if the Supreme Court sanctions the machine-or-transformation test and basically upholds the federal circuit, it will be almost impossible to get any kind of business method — or even a general purpose computer-implemented method — patented.”

That, he says, is where things get dicey. In the KSR v. Teleflex case the High Court “seemed to express the view that it did not like rigid, bright line tests in the patent area,” Harris notes. “The justices did not completely disavow the ‘teaching-suggestion-motivation’ test used in considering whether an invention is obvious or not; they said one could use it, but other considerations could apply.” The decision in Bilski could similarly refrain from completely disavowing or embracing the machine-or-transformation test, he adds. “That would be a relatively easy way for the court to make a ruling that denies a patent for the particular claims in Bilski without a severe disruption in the body of case law relating to determination of patentable subject matter.”

The Court could, however, “step in and decide it will make some public policy about patentable subject matter,” he cautions. “The justices have been known to do that from time to time. Determining the public policy of what constitutes patentable subject matter is really something that Congress should address — but will probably not any time soon.” There is no provision in the Patent Reform Act of 2009 regarding how to determine patentable subject matter, Harris notes, nor obviousness, for that matter. “I doubt that Congress can focus on patent issues in any meaningful fashion in this economy or in the foreseeable future due to bigger problems,” he says.

Another fear is the Supreme Court imposing an entirely different test or dictum that is not limited to non-technical business methods. “Such dictum could readily be viewed as providing a basis to deny patents for even arguably novel computer-implemented business methods,” Harris says, “or, more problematically, many aspects of computer software itself. The patentability of computer software, either by itself or as an integral part of other technologies, is an area of controversy for patentable subject matter, and many of the legal issues of patentability of business methods bleed over into a consideration of the patentability of software and IT.”

That, he says, is really a worst-case scenario for IT companies and patent holders – and the U.S. economy, which is heavily dependent on information technologies. “Any ruling by the Supreme Court that sends a message that innovators in the IT space cannot protect their innovations via patenting,” he says, “could deal a blow to U.S. competitiveness and further damage the economy.”

Contact Alter at 303-607-3500 or salter@faegre.com; Blakeslee at 410-516-8300 or starman@jhu.edu; Baker at 906-487-2228 or at jrbaker@mtu.edu; Harris at 404-504-7720 or jharris@mmmlaw.com; Aston at 650-324-1677 or djaston@pvjsa.com; Macedo and McCaffrey at 212-336-8000 or cmacedo@arelaw.com; and Muhleck at 248-380-9300 ext. 111 or at lmm@quinnlawgroup.com.